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The Tenth District economy showed some signs of improvement in late October and early November after slowing earlier in the fall. Retail sales excluding autos rose somewhat, the manufacturing sector appeared to stabilize, and energy activity edged up. In addition, housing activity remained solid across most of the District. On the negative side, however, auto sales continued to decline, commercial real estate markets weakened further, and layoff announcements remained higher than a few months ago. In the farm economy, recent rains helped alleviate some of the difficulties caused by the drought. Wage and price pressures were generally subdued.
Retail sales in the District increased slightly in late October and early November following small declines in previous months. Sales at discount stores and many department stores rose solidly and spending on all types of apparel was strong. High-end stores and some other retailers, however, reported flat to slightly lower sales compared with earlier in the fall. Managers of stores experiencing a recent increase in sales were optimistic about the approaching holiday season, while other managers were more uncertain. There was generally more satisfaction about inventory positions than in previous surveys, as the overall stronger sales in recent weeks have helped reduce stock levels somewhat. Motor vehicle sales across the District continued to decline in late October and early November, despite generous incentives from manufacturers. Most dealers expect sales to improve somewhat over the next few months, but only a few plan to build inventories from current levels. In the tourism industry, leisure travel was solid in most of the District. Ski resort operators in Colorado and New Mexico were encouraged by early snows, and several resorts reported sizable increases in advance bookings from recent years.
District manufacturing activity appeared to stabilize somewhat in late October and early November after easing earlier in the fall, and plant managers' optimism about future activity increased. Production, shipments, and new orders all improved from the previous survey. However, these measures of activity remained close to the weak levels posted last fall, and most plants were still operating at only medium levels of capacity utilization. Managers generally reported few difficulties in obtaining materials, but firms continued to face a squeeze on profits due to increases in materials prices and decreases in selling prices. Looking ahead, an even higher proportion of firms than in the previous survey expect to raise production over the next six months. However, managers generally do not expect significant changes in capital spending or hiring over that time period. Many firms said they can nevertheless continue to modestly increase production in the near term by raising utilization rates, improving management techniques and productivity, and requiring more overtime from current workers.
Real Estate and Construction
Residential real estate activity in the District remained solid in late October and early November, but most commercial real estate markets weakened further. Housing starts continued at high levels in most areas and even showed some signs of steadying in Colorado, where activity had been slowing. Most builders expect only seasonal slowing in home construction through the winter. Realtors reported that home sales increased in most District cities and remained solid elsewhere. However, they also reported slight declines in average selling prices in some areas. Home sales are expected to remain fairly steady in coming months. Mortgage lending activity remained strong in late October and early November, particularly for refinancings. As in the previous survey, lenders reported that most of the recent refinancing activity was for the purpose of reducing monthly payments rather than for taking cash out. Mortgage demand is generally expected to remain solid in coming months. Commercial real estate activity remained depressed across the District. Construction, absorption, and prices of office space in most District cities were down slightly from late summer, and vacancy rates were somewhat higher. Commercial realtors in some areas foresee continued weakening in office markets, while others expect activity to level off in the near future.
Bankers reported that loans edged up and deposits held steady since the last survey, raising loan-deposit ratios slightly. Demand increased slightly for commercial and industrial loans, consumer loans, home mortgages, and home equity loans. Demand for other categories was unchanged. Some bankers attributed the increased demand for consumer loans, home mortgages, and home equity loans to lower interest rates. On the deposit side, small increases in liquid accounts such as demand deposits and NOW accounts were offset by a slight decline in large CDs. All respondent banks reduced their prime lending rates and consumer lending rates since the last survey. Lending standards were generally unchanged.
District energy activity increased slightly in late October and early November. The count of active oil and gas drilling rigs in the region edged up following recent rises in some energy prices. Although inventories of natural gas are high, District contacts say current productive capacity may be insufficient to replenish supplies in the event of unusual increases in demand over the winter. As a result, natural gas prices are largely expected to hold recent gains, leading to further increases in drilling activity.
Difficulties in the District's farm economy due to this year's drought were alleviated somewhat by rain in many areas in late October and early November. The rains delayed the fall harvest but aided in the early development of the winter wheat crop. Subsoil moisture was still very short, however, and concerns remained about further development of the wheat crop and recovery of District pastures if the moisture subsides. Despite poor pasture conditions, adequate forage supplies were expected for the winter months, as more corn was harvested for silage instead of grain this year. However, feedstuffs were more expensive than normal, and producers in the western part of the District had to travel long distances to buy hay. District bankers reported there have been relatively few recent land sales and that land values were holding steady.
Wages and Prices
Wage and price pressures remained virtually nonexistent across the District in late October and early November. Labor markets were still very slack, allowing many employers to be more selective in hiring. Layoff announcements in the District also continued at a higher rate than at the end of the summer. There was practically no evidence of wage pressures, and most firms expect little change in their wage structure for next year. However, many employers continued to express concerns about rising health-care premiums, and some firms said they would be passing more of the cost increases on to employees in 2003. Retail prices remained flat in late October and early November, and retailers generally expect stable prices until post-holiday clearance sales begin. Some builders reported increases in plywood prices, but construction materials prices are expected to be flat in coming months. Manufacturers reported another slight decline in finished goods prices and expect them to edge down further. Prices for some manufacturing materials--mainly steel and petroleum-based products--continued to rise, but not as much as in past surveys. Plant managers expect only modest increases in materials prices going forward.